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    Saturday, August 20, 2022

    Oil refineries are making a windfall. Why do they keep closing?

    Hilco Redevelopment Partners is spending hundreds of millions of dollars to convert the 1,300-acre site along the Schuylkill River into a green, high-tech campus for e-commerce and life sciences companies shown in this rendering. (Hilco Redevelopment Partners)

    Philadelphia -- As the energy crunch drives record profits at American oil refineries, the owners of what had been the largest such facility in the Northeast have no regrets about tearing the place down.

    Hilco Redevelopment Partners has been hauling out 950 miles of pipe from the former Philadelphia Energy Solutions refinery, abandoning the property's 150-year history of processing crude oil into fuel in this city. The firm is spending hundreds of millions of dollars to convert the 1,300-acre site along the Schuylkill River into a green, high-tech campus for e-commerce and life sciences companies.

    "I don't even know how to operate a refinery," said Roberto Perez, chief executive of Hilco, which bought the property in a bankruptcy auction in 2020, a year after a massive explosion at the refinery rattled the city. "It's not what we do."

    Oil refineries across the country are being retired and converted to other uses as owners balk at making costly upgrades and America's pivot away from fossil fuels leaves their future uncertain. The downsizing comes despite painfully high gasoline prices and as demand globally ramps up amid sanctions on gasoline and diesel produced in Russia, the third-biggest petroleum refiner in the world, behind the United States and China.

    Five refineries have shutdown in the United States in just the past two years, reducing the nation's refining capacity by about 5 percent and eliminating more than 1 million barrels of fuel per day from the market, leaving the remaining facilities straining to meet demand. Yet even at this lucrative moment for what's left of the refining industry, a White House desperate to bring down gas prices is having little success persuading owners to expand operations, and more closures are imminent.

    The futility of the White House effort came through in the response to letters President Joe Biden sent this week to the nation's major oil companies, chastising them for squeezing "historically high profit margins" out of their refineries. "At a time of war, refinery profit margins well above normal being passed directly onto American families are not acceptable," Biden wrote. Biden threatened to invoke emergency powers if the companies don't bring prices down.

    The companies are unmoved. The profits follow years of heavy losses at many facilities after demand plunged during the pandemic. Unpredictable shifts in oil markets had created a challenging business climate before that. Even at this moment of windfall refinery earnings, when the profit margin on each barrel of oil processed has jumped from a dollar or two a year ago to as much as $18 today, investors are hardly jumping at the opportunity to enter the sector. They fear the profits are short lived. The administration's environmental priorities -- as well as rising public and corporate concern about climate change -- would make many refineries obsolete in the not-too-distant future.

    Building and upgrading the mammoth structures is a messy, expensive undertaking that can drag on longer than a decade, strain the finances of even the biggest fossil fuel giants and run the risk of getting abandoned before that investment is returned.

    "I don't think you are ever going to see a refinery built again in this country," Chevron CEO Michael Wirth said in an interview with The Washington Post this month.

    "It's been 50 years since we built a new one," Wirth said. "In a country where the policy environment is trying to reduce demand for these products, you are not going to find companies to put billions and billions of dollars into this."

    Some of the nation's 129 refineries are owned by large oil companies such as Chevron, while others are operated independently. At the facilities, the components of crude oil are separated and processed into fuel for vehicles and planes, as well as industrial petroleum products such as lubricants.

    The last major refinery to come online in the United States, in 1977, is the one owned by Marathon Oil in Garyville, La. It is capable of pumping out 578,000 barrels per day. Since it opened, more than half the refineries in the U.S. have closed.

    While the Biden administration says market manipulation by Big Oil is behind the shortage of refined fuel right now, the major fossil fuel companies don't have a monopoly on production. There is a large refining facility in Houston up for sale right now.

    "If there was someone out there who believed this would be a strong business in the future, this is an asset they could buy," said Jacques Rousseau, a managing director at ClearView Energy Partners, an independent research firm.

    The problem: Nobody wants to buy it. There has not been a single viable bid.

    In the absence of any offers, LyondellBasell plans to shut its 700-acre operation on the Gulf Coast no later than the end of next year. Quitting the refining business, the company said in a statement, "is the best strategic and financial path forward." The company did not comment on industry speculation that a fire that knocked part of its century-old Houston facility offline last week may push the closure date even sooner, as LyondellBasell faces the prospect of costly repairs.

    The facility refines about 264,000 barrels of crude oil per day.

    "These are aging physical plants where steel needs to be replaced, equipment needs to be overhauled, new pumps maybe needed," said Ed Hirs, an energy economist at the University of Houston.

    "Just getting the equipment you need could take three years. Electric vehicles might already make up 20 percent of the car market by then. You could find yourself investing a bunch of cash to rebuild a refinery that may not be needed for long."

    The White House would have to take extreme steps to compel companies to refine more right now. That could involve Biden invoking emergency powers to curb exports of refined gasoline and diesel or to force companies to restart operations at idled American refineries, according to a memo ClearView sent clients.

    The president wrote in his letter that he is "prepared to use all tools at my disposal" to bring prices down, scolding oil executives for making record profits off a refining shortage that is "blunting the impact of the historic actions" by the White House to confront soaring gas prices. Those actions included releasing 1 million barrels per day from the Strategic Petroleum Reserve and the suspension of an environmental rule limiting high blends of ethanol into gasoline in the summer.

    Analysts caution that any actions the White House tries to take to spur more production could backfire. Curbing exports, for example, would intensify fuel shortages in Europe and could lead to further political destabilization there. It could also motivate companies to move more operations overseas, worsening shortages in the United States.

    "The problem is we are running the existing refineries at full power," said Jason Bordoff, founding director of the Center on Global Energy Policy at Columbia University. "There is not a lot of ability to require industry to refine more than it already is."

    The case of the shuttered Philadelphia Energy Solutions refinery illustrates how little influence the White House has over such operations.

    The Trump administration had worked aggressively to keep the plant that was churning out 335,000 barrels of fuel per day from closing, warning it played an important role in U.S. energy security and independence. The White House had dispatched Peter Navarro, a top Trump economic adviser, to try to help advance the bid of a group of energy executives who planned to rehabilitate the bankrupt facility.

    The bid, which had the backing of organized labor, fizzled.

    The city was emerging from the trauma of a refinery explosion that sent an enormous fireball over the area and catapulted large pieces of machinery throughout the property. A 38,000-pound fragment of the plant was hurled across the river by the explosion. Nobody was killed, but 3,271 pounds of highly toxic hydrofluoric acid leaked into the community. It can cause lung damage and severe skin burns, according to the Centers for Disease Control and Prevention.

    The explosion was triggered by a pipe that had not been inspected since 1973. It was so corroded that the pipe's metal had become thinner than a credit card, according to investigators from the U.S. Chemical Safety Board. The board noted that such corrosion had been the culprit in earlier refinery explosions in California and Utah, and "it's just a matter of time" before another such explosion at a refinery leads to fatalities or contamination of a community.

    The Philadelphia refinery had already fallen into bankruptcy the year before it was engulfed by fire. New pipelines from the North Dakota Bakken region and the Permian Basin in Texas had begun pumping crude directly to Gulf Coast and Midwest refineries. Those refineries could then afford to sell their products much more cheaply than the Philadelphia facility, which could access the North Dakota and Texas crude only through rail car shipments.

    Like many of the nation's refineries, the one in Philadelphia was not equipped to process all types of crude. It could not, for example, handle the heavy crudes from Canadian tar sands that became available on the market for cheap, pushing the Philadelphia facility into further financial despair.

    The refinery was also not equipped to blend ethanol into its fuels, forcing it to purchase expensive credits on the open market to meet its obligations under the federal Renewable Fuels Standard. The price of those credits had soared by 2017, creating a crushing financial burden.

    Facing a city unnerved by the refinery's public safety risks and immense greenhouse gas emissions, a shaky financial outlook, and tepid interest from investors, proponents of keeping the refinery going found themselves overshadowed by a large coalition of groups looking to turn the page.

    "This is a phenomenon we are seeing around the country," said Cary Coglianese, director of the program on regulation at Penn Law. "Neighborhoods are growing up around these facilities. There are lots of people who are not benefiting from the jobs they bring but are suffering the risks associated with them. It changes the political playing field dramatically."

    Perez, who is based in Chicago, vividly recalls the day one of his colleagues approached him with the idea of buying the refinery. It struck him as absurd, knowing the cleanup would cost hundreds of millions of dollars, the environmental liabilities are immense and it would take years to tear down the thicket of pipes and heavy equipment.

    "I said, 'We are not buying a refinery,' " Perez said. "I don't even need to see it."

    But Perez was lured out, and on his visit, he was struck to find the property just down the road from the airport, close to downtown Philadelphia and right by the port. It struck him that the highest and best use for such a strategically located piece of land in a city serious about going green was no longer petroleum processing.

    "The community was very excited by our commitment to taking the refinery offline," said Perez, whose company bought the property for $252 million. "Within day one of closing, we started the endeavor of unwinding 150 years worth of refining operations here."

    Flames and smoke emerge from the Philadelphia Energy Solutions Refining Complex in Philadelphia, Friday, June 21, 2019. (AP Photo/Matt Rourke)
    Exhaust billows from Philadelphia Energy Solutions Refining Complex in Philadelphia in this 2019 file photo. (AP Photo/Matt Rourke)

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